By Anna Mudeva
SOFIA, Oct 30 (Reuters) - The Bulgarian government approved on Thursday its 2009 budget draft, torn between keeping fiscal prudence needed to respond to the global financial crisis and temptations to increase spending ahead of elections.
The draft targets a surplus of at least 3 percent of GDP, the same as this year, but also raises social and capital spending, which analysts said aimed at boosting the government's falling popularity ratings before parliamentary elections next summer.
The Socialist-led ruling coalition has seen support plummeting as Bulgaria remains the poorest European Union nation and due to its failure to curb corruption and crime.
Prime Minister Sergei Stanishev said the government was ready to cut the planned surplus next year to 2 percent to pump more money in the economy if growth slowed below the expected 4.7 percent and foreign investment plunged. "We have prioritised spending that would help respond to the global conditions and maintain macroeconomic stability," he told a news conference.
Analysts say Bulgaria, along with fellow ex-communist EU newcomers Romania and the Baltic states, is among the most vulnerable emerging economies due to its heavy dependence on foreign cash and a current account gap of over 20 percent of GDP.
As global credit conditions and liquidity tighten, Bulgaria is exposed to escalating risks and a substantial slowdown in economic growth, possibly below 3 percent, economists say. Some do not rule out a recession, already seen in the Baltics.
RATING DOWNGRADE
Earlier on Thursday, ratings agency Standard & Poor's cut Bulgaria's credit rating to BBB from BBB+ with a negative outlook, citing worries about external imbalances and cooling.
The government plays down the external risk and has so far not announced a concrete rescue package for use if Bulgaria gets severely hit, saying the country's banks were safe and the impact of the crisis was indirect.
"If we had such an (emergency) plan, we would not announce it because we do not foresee such a (worst case) scenario," Finance Minister Plamen Oresharski told the news conference.
Stanishev said Bulgaria's fiscal and forex reserves of over 15 billion euros were enough to safeguard the economy.
On Monday, when the budget draft was announced, the ruling coalition said it would increase capital spending by 20.9 percent to 5.192 billion levs ($3.31 billion) to make up for an expected slowdown in foreign investment. Now the cabinet has decided to add another 400 million levs to that.
It also plans to raise by up to 500 million levs the capital of a state-owned development bank, which extends credits to small and medium-sized businesses.
The budget draft envisages a 20-percent increase in pensions next year and a 10 percent rise in public sector wages as well as more money for education and healthcare.
"With this we will achieve a 100-percent increase in pensions during our four-year mandate," Stanishev said.
But some economists say that instead of spending more, the government should instead deal with economic reforms and prepare adequate measures if Bulgaria plunged into recession.
"Instead of reforms, the government plans to ... raise spending on non-reformed sectors. None of this is justified in a normal environment but even less so in the current situation of insecurity," wrote Georgi Angelov, economist at Open Society.